Current ales revenue is $5,000, total variable costs ar ,00o, and totall foced c

Question

Current ales revenue is $5,000, total variable costs ar ,00o, and totall foced costs are 1,000 no data on units). a) Comput te ctributlon margin ratlo: b) Write down the CVP relation (version 2): profit as a function of sales revanuc. Pratit eg. if prfit*Revenue-00, enter 0.1 in the firat box and 3uo in the second bex) c) Predict profit at sales revenue of sio,DoO: d) Your boss gave you profit target of $5,000. How much do you need to sell in dollars to miect this target? e) Compute the breakeven revenue: f) Whern sales revenue increases by $1,0(from any initial level in the relevant range), profit increases by: O not enough information CMR"$1,000=$600

Explanation / Answer

Contribution margin ratio = (contribution margin)/sales x 100

Contribution margin = sales – variable cost

Sales revenue = $5,000

Variable cost = $2,000

Contribution margin = $5,000 - $2,000 = $3,000

CMR = (3,000/5,000) x 100

CMR = 60%

profit =

0.4

x

$5,000

To express profit as a function of sales revenue,

Determine profit

Profit = sales – variable cost – fixed cost

= contribution – fixed cost

Fixed cost = $1,000

= $3,000 - $1,000 = $2,000

Profit as a function of sales revenue = $2,000/$5,000 = 40%

Profit = 40% of sales revenue

Hence profit at sales revenue of $10,000 = $10,000 x 40% = $4,000

Using the profit as a function of sales revenue of, profit = 40% of sales revenue

Sales revenue = profit/40%

Hence, desired sales revenue at target profit of $5,000 = $5,000/40%

Desired sales revenue = $12,500

Break-even revenue = fixed cost/CMR

Fixed cost = $1,000

CMR = 60%

Break-even revenue = $1,000/60% = $1,667

Operating leverage helps in determining change in profit with change in sales revenue.

Operating leverage = contribution margin/profit

Contribution margin = $3,000

Profit = $2,000

Operating leverage = $3,000/$2,000 = 1.5

Change in profit with change in sales = operating leverage x percent increase in sales

Percent increase in sales = (1,000/5,000) x 100 = 20%

So, change in profit = 1.5 x 20% = 30%

So, profit increases by 30% when sales increase by $1,000

So, increase in profit = 30% of original profit

= 30% x $2,000 = $600

The correct option,

CMR x $1,000 = $600

profit =

0.4

x

$5,000

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